by Calculated Risk on 9/15/2009 10:19:00 PM

From David Streitfeld at the NY Times: Fight Looming on Tax Break to Buy Houses

When Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it.

As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

Streitfeld discusses some of the proponents of extending and expanding the tax credit (like the NAR), and some of the opponents (most economists on the right and left).

Dean Baker of the Center for Economic and Policy Research called the credit “a questionable redistributive policy” from renters to home buyers, but said that he used it himself when he bought a house.

He wrote on his blog: “Thank you very much, suckers!”

Mark Zandi at Economy.com supports extending and expanding the tax credit because he believes the housing market is still in serious trouble:

"The risks of not doing something like this are too great,” [Zandi] said. “I don’t think the coast is clear.”

But if we actually look at the numbers, this is a poor choice for a second stimulus package. The NAR recently reported:

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

You can calculate the new $15 billion projection; 1.9 million times $8,000.

But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.

Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.

REMEMBER: Many homes will be sold to buyers who would have bought anyway without the credit. These buyers will still receive the credit. This year almost 2 million home buyers will claim the tax credit, but only 350,000 were additional buyers. That means this was a poorly targeted tax credit since so many people receive it who would have bought anyway. Targeting is the problem with any tax credit.

Mark Zandi is arguing to expand the credit all home buyers, including investors. Then the cost would be much higher than the $30 billion estimate - maybe $75 billion based on 5 million homes sold. Maybe closer to $90 billion if we include new home sales. But that would be a huge gift to a majority of buyers.

Here is a more effective tax credit:

The real problem is the number of households, not home sales. Many people have doubled up during the recession with friends and family, and will probably be looking to rent or buy once they get back on their feet. An incentive for new household formation (for people that were part of another household for the last year or two) would be much less expensive, would be more targeted (recipients would have to show they were part of another household) and would reduce the excess inventory of all housing units.